Most investors still don’t understand dividend stocks.
Because they spend way too much time obsessing over one figure — the dividend yield — and ignore stocks with payouts below some arbitrary number, say 2%, which is about what the SPDR S&P 500 ETF (SPY) pays.
Consider Visa Inc (V), a stock that gets zero love from the dividend crowd, no thanks to its 0.69% trailing-twelve-month yield, which has gone nowhere for five years:
Visa’s Dividend Downer
But if you’ve ignored Visa because of its low yield, you’ve missed out big time—this “boring” chart is actually a sign of powerful growth.
Because what it’s really showing us is that investors have been bidding up V’s share price in lockstep with its payout hikes (because you calculate yield by dividing the annual dividend by the current share price).
And that dividend growth has been obscene:
The Story Yield Doesn’t Tell
That comes out to a 200% increase over five years! Put it all together, and you can see exactly how those hikes have thrown a relentless lift under the share price, propelling the stock up almost exactly as much as the dividend.
An Unmistakable Pattern
So if you’d bought in five years ago, you’d actually be sitting on a 215% total return (including dividends) on your Visa shares today. And forget about a 0.69% yield—you’d be reaping 2.3%.
Which brings me to the other reason why investors sometimes shun V: its seemingly high forward price-to-earnings (P/E) ratio of 26.7. But the truth is, it’s averaged almost precisely that over the last five years, when the stock went on its stellar run.
The bottom line? You need to look beyond yield and P/E when picking dividend stocks. Adding two other stats will give you a more complete picture:
- The payout ratio—or the percentage of earnings paid out as dividends in the last 12 months—is a measly 23%, so V has plenty of dividend-growth juice left. I consider any figure below 50% a sign of a safe dividend (and higher for real estate investment trusts (REITs), as I’ll explain in a moment.
- Earnings growth: in its fiscal 2017 first quarter, Visa’s earnings per share (EPS) jumped 7.5%, to $0.86 from $0.80 a year ago; the Street expected EPS to fall to $0.78. For all of fiscal 2017, analysts see EPS hitting $3.32, up from $2.84 in fiscal ’16.
4 More Dividend Growers With Big Hikes Ahead
To find more stocks ready to set us up for big dividend (and share price) growth in the next five years, I’ve scanned the market for names with the same telltale signs as Visa.
As a kicker, I’ve also screened for stocks that hiked their dividends around this time last year—boosting the odds of a big payout increase (and corresponding pop in the share price) as soon as this spring.
Keep in mind that one (LSI) is a REIT, so I’ve used funds from operations (FFO)—a staple when it comes to measuring REIT performance—rather than EPS for that stock in the last two columns.
Here’s a closer look at our four picks.